25th Jun 2022

UK cuts VAT to jumpstart economy

  • Chancellor Angela Merkel is resisting calls from France and the UK to put more money in the EU stimulus package. (Photo: The Council of the European Union)

The British government was set to announce a cut of 2.5 percent to its value-added tax on Monday (24 November) as part of a broader stimulus package aimed at jumpstarting the economy. Meanwhile, German Chancellor Angela Merkel was resisting calls for similar moves from her party over the weekend and is set to meet French President Nicolas Sarkozy about the EU rescue package to be unveiled on Wednesday.

The British VAT cut from 17.5 to 15 percent, the lowest rate allowed by EU law, was to be presented on Monday by finance minister Alistair Darling as part of the pre-budget report aimed at increasing consumer spending and thus pumping more money into the economy.

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But Conservative leader David Cameron has warned the government's plans will lead to a future "tax bombshell," with UK's external borrowing skyrocketing to record levels of over €118 billion (£100 billion).

Leading British retailers also feared that the VAT cut would be too little, as shoppers were reluctant to make much even of the sharp price reductions unveiled in recent days by high-street retailers.

Andy Garbutt, retail director of consultants PWC, thought the VAT reduction would only have a "marginal impact."

"Are people going to notice 2.5 per cent? In retail it really has to be a fifth or a quarter," he told the Telegraph.

The British newspaper also noted that retailers who sold at fixed prices could "pocket the difference" and not go through the trouble of recalculating the prices.

Merkel under pressure

Meanwhile, in Germany, similar VAT cuts were planned for the 2009 post-election period, with conservative Chancellor Angela Merkel reluctant to move earlier, despite calls from within the Christian Democrat's Bavarian sister party, the Christian Social Union, and the business community.

Pressure was also coming from outside for the German government to move more quickly, with French President Nicolas Sarkozy receiving Ms Merkel on Monday to talk about the EU stimulus package set to be unveiled on Wednesday.

According to the Frankfurter Allgemeine, Paris was not happy with the German contribution to this package and thought Berlin had "more room for manoeuvre."

Yet Ms Merkel was not willing to concede more, as Germany was already stretching its budget and increasing its external debt by €18 billion in order to finance the national rescue package.

On the climate change front, Ms Merkel was also facing calls from her fellow conservatives to try to water down the EU agreement until the recession-plagued economy was back on track.

Bavarian premier Horst Seehofer said in an interview with the Bild am Sonntag newspaper that he had written to Merkel calling on her to back away from EU climate protection goals set to be approved next month.

"The automobile industry needs more room to manoeuvre in its implementation" of the targets, he said. "What good are multi-million-euro fines (for violating emissions rules) if at the end of the day the jobs are gone?" said Seehofer, whose state is home to such German automakers as BMW and Audi.

German economy minister Michael Glos, also a member of the Christian Social Union, agreed that Germany could ill afford to make a priority of climate protection while the economy is hobbled by the global financial crisis.

"It is not the time to burden the economy with excessive environmental targets," he said.

And the conservative premier of Lower Saxony, Christian Wulff, also called for a two-year hiatus to the EU climate package.

Until now, Ms Merkel has been a champion of the EU's climate change plan, having brokered a promise last year by EU leaders to cut greenhouse gas emissions by 20 percent on 1990 levels by 2020.

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